Both 401(k) plans and annuities are considered financial vehicles that can help you to save for retirement. Therefore, these options have some similarities and some differences. The good news is that there is actually a way to benefit from both.
In terms of their similarities, annuities and 401(k) plans allow your savings to grow on a tax-deferred basis. This means that your funds can compound year after year without be subject to tax until the time of withdrawal.
When it comes to providing an income stream, though, annuities and 401(k) plans can differ quite a bit. For instance, a 401(k) can only pay out the amount of money you put into it, plus its earnings. This means that eventually, these funds may run out.
On the other hand, with the lifetime income option on an annuity, you can rely on an income stream for the remainder of your life – even if you live for many years. This is true, regardless of what happens in the stock market, or even in the economy overall. For this reason alone, it proves how important it is to understand how annuities work, especially when compared to 401(k) plans.